German Corporate Governance Research Articles

DO HARD CASES MAKE BAD LAW? THE EFFECTIVENESS OF GERMAN’S APPROACH TO STRENGTHEN FINANCIAL MARKET INTEGRITY

Background: As a direct consequence of the Wirecard scandal from 2020, which brought the work and, above all, the cooperation of the executive board, supervisory board, and external auditors into the focus of the legal discussion, the German legislator adapted the Stock Corporation Act and also the German Corporate Governance Code has been adapted. Executive board members of Wirecard have been subjected to a criminal investigation after reporting fake revenues and air bookings worth billions. The German Stock Exchange, the Federal Institute for Financial Services Supervision, the Financial Reporting Enforcement Panel, the auditing firm, and the Wirecard supervisory board were all criticized for failing to detect the problem earlier. Former Wirecard stockholders lost money, and lawsuits were filed seeking compensation from the statutory auditor, Wirecard AG, and former board members. Research purpose: Following the formal amendment of the law and the GCGC, the focus is now on the effectiveness of the law and the GCGC in practice. The purpose of this study is to assess whether the German solution to strengthening financial market integrity is effective. Research hypothesis: It is hypothesized that German corporate governance requires additional improvements and further reforms. Methods: The analysis of academic literature, journal and magazine articles, reports, and other relevant literature has enabled the author to empirically build the hypothesis of this document and to identify and address major issues that require further amendments in law as well as and additional studies. Conclusions: The reform of the German law has a substantial impact on the work of companies, its main bodies and statutory auditors. It is evident that certain provisions require modification, and further reforms are both expected and necessary to address the gaps. Aspects of trust, transparency, control and monitoring need to be in the focus of the legal discussion as well as the internationalization of stock corporations with the overarching goal to ensure financial market integrity and to regain trust in German companies.

The role of audit committee chair tenure—A German perspective

This study empirically examines the association of audit committee chair tenure and various reporting quality measures in a German setting. As the debate about the role of tenure has refuelled since the German corporate governance codex first introduced an upper limit for director tenure in 2019, this topic is of particular importance. My findings show that longer tenured audit committee chairs are positively associated with higher levels of earnings management and negatively associated with the audit report lag and the likelihood of error identification by the German financial reporting enforcement panel. I draw upon social bonding to discuss these findings, which seem to be heterogeneous from a reporting quality perspective. I argue that social bonding between management and the AC chair drives the results for earnings management, while it does not impair the AC chair's influence on the audit process. My findings are important from a regulatory and practical perspective.

Internal Diversity in German Corporate Governance: A QCA Analysis

We investigate the set of conditions leading to major employee turnover in the governance of large listed German companies further to labour market liberalization for non-standard employment. Using the Qualitative Comparative Analysis (QCA) approach, we illustrate that substantial employee turnover in the core manufacturing sector occurs under the restrictive context of high debt as a necessary condition. In the non-manufacturing sectors, in contrast, downsizing programmes take place under a set of permissive, and alternative, combinations of sufficient conditions driven by shareholder value maximisation objectives: the presence of ownership diffusion in the ownership structure of companies, the importance of highly financialized investors (hedge funds/private equity), or the presence of CEOs with an educational background in law and/or business management. We provide important insights for understanding patterns of change in corporate governance by integrating the QCA approach with theoretical perspectives stressing the characteristics of actors’ identities in combination with their external business environments. The diffusion of new practices in contested contexts will be characterised by the presence of necessary, and restrictive, conditions whilst more favourable contexts will be associated with the presence of non-competing (i.e. alternative) sets of sufficient conditions.

Corporate governance reporting: Compliance with upper limits for severance payments to members of executive boards in Germany

We examine how corporate governance reporting corresponds to actual conduct regarding severance payment caps for prematurely departing members of executive boards in Germany. Firstly, we evaluate the declarations of conformity for all companies listed in the CDAX between 2010 and 2014, which we use to determine conformity and deviation rates, and analyse the reasons for deviation, contributing to current research on comparative corporate governance, which focuses on when, why and how companies deviate from legitimate corporate governance goals (Aguilera, Judge, & Terjesen, 2018). Secondly, we assess the compensation amounts of all severance payments made and published by DAX companies to compare the respective severance ratio with the cap recommended by the German Corporate Governance Code (GCGC). We find that more than 20% of companies listed in the CDAX declared deviation in the declaration of conformity. Moreover, in 57% of actual severance cases where DAX companies had previously declared their conformity, the cap was exceeded. Yet, none of the companies that had exceeded the cap disclosed this in the following declaration of conformity. In most cases, the corporate reports deviated from reality and therefore could not serve as a suitable basis for decisions by the capital market.

Evolution of German corporate governance (1995-2014): an empirical analysis

PurposeThis paper aims to address the evolution of corporate governance in Germany with a particular regard to whether there can be observed a gradual convergence to a shareholder primacy corporate governance system.Design/methodology/approachTo investigate a potential shift of the German corporate governance system to an Anglo-American tiled corporate governance system, the authors have empirically assessed on a polynomial base 52 separate company and corporate governance variables for 20 years (1995-2014).FindingsThis research suggests that a gradual convergence has taken place prior to the global financial crisis. However, the results suggest that the convergence process experienced a slowdown in the aftermath of the global financial crisis, which may be linked to the stability of the German corporate governance system during the global financial crisis and the political environment during this time.Originality/valueThis paper contributes to the research by not only analysing the development of the German corporate governance system but also identifying new reasons for this development and explaining why a new convergence process may be observed in the future again.

Compliance with the German Corporate Governance Code: Can the heterogeneous implementation be explained?

Starting with the Cadbury code in 1992, various national and international Corporate Governance (CG) codes have been issued all over the world. So far, empirical studies have revealed mixed results concerning the effects and outcomes of code implementation and thus supported the hypothesis of a ‘one system does not fit all’ approach in CG. Therefore, this paper empirically analyses influence factors on compliance with the German Corporate Governance Code for a large sample of 306 listed firms in 2015. We chose German companies because of the specific institutional settings in Germany, e.g., the strong influence of founder families on a firm’s management or the relevance of debt financing. It is assumed that the country-specific institutional setting limits the transferability of results of US and UK studies. Thus, we used the German setting to derive relevant influence factors on Code compliance. In addition, we applied a more sophisticated measure of Code implementation than previous studies. Overall, we find a significant positive effect of ownership dispersion and firm size on Code compliance, whereas the other influence factors, e.g., family influence or the supervisory board’s size, reveal the right direction of impact but not the required level of statistically significance. In contrast to institutional theory, we find a negative although statistically insignificant impact of the strength of foreign investors’ influence on Code compliance. Overall, our results indicate that the institutional setting is not decisive for Code compliance. Instead, we assume that the main rationale for Code compliance is not the reduction of agency conflicts but the alignment with peer group practices as indicated by the variable company size. Future research should investigate the peer effects on the level of Code compliance in detail.

Zur Empfehlung von Abfindungsobergrenzen für Vorstandsmitglieder

Zusammenfassung In diesem Beitrag wird untersucht, ob Vorstandsabfindungen von börsennotierten Unternehmen durch die Empfehlung 4.2.3 Abs. 4 Satz 1 des Deutschen Corporate Governance Kodex in der Fassung vom 7. Februar 2017 in ihrer Höhe begrenzt werden. Die dort vorgeschlagene Vereinbarung einer Begrenzung der Abfindungshöhe im Anstellungsvertrag entfaltet jedoch bei der vorzeitigen Vertragsbeendigung mittels eines Aufhebungsvertrags keine rechtliche Bindungswirkung. Die Analyse umfangreicher empirischer Daten zu Entsprechenserklärungen aller CDAX-Unternehmen in den Jahren 2010 bis 2014 zeigt, dass signifikant mehr als 20 Prozent der Unternehmen die Vereinbarung der empfohlenen Obergrenze ablehnen. Des Weiteren kann für die tatsächlichen Abfindungsrelationen vorzeitig ausgeschiedener Vorstandsmitglieder von DAX-Unternehmen in den Jahren 2010 bis 2014 gezeigt werden, dass die empfohlenen Obergrenzen trotz anderslautender Entsprechenserklärungen mehrheitlich überschritten wurden. Auf Basis der empirischen Ergebnisse wird eine Gestaltungsempfehlung für die Praxis abgeleitet, welche der Empfehlung zu einer stärkeren Wirkung verhelfen kann.

Corporate Governance Reporting: Compliance with Upper Limits for Severance Payments to Members of Executive Boards in Germany

This paper examines how corporate governance reporting corresponds to actual conduct regarding severance payment caps for prematurely departing members of companies’ executive boards in Germany. For this purpose, we first evaluate the declarations of conformity for all companies listed in the CDAX between 2010 and 2014, which we use to determine conformity and deviation rates, and analyse reasons for deviation. In a further full survey, we assess the compensation amounts of all severance payments made and published by DAX companies to their executive board members who were prematurely terminated, which allows us to compare the respective severance ratio with the cap recommended by the German Corporate Governance Codex (GCGC). We find that more than 20% of companies listed in the CDAX declared deviation in the declaration of conformity, and one-third of all deviations were justified by a rejection of the normative decision of the recommendation. Moreover, in 57% of actual severance cases where DAX companies had previously declared their compliance, the cap was exceeded; yet, none of the companies that had exceeded the cap in a severance case disclosed this in the following declaration of conformity. In the years under review, for the majority of severance cases in companies listed in the DAX, the GCGC’s cap did not have any factual binding effect. Finally, in most cases the corporate reports deviated from reality and therefore could not serve as a suitable basis for decisions by the capital market.

Successfully mobilizing for employee board representation

PurposeThe equal representation of employees on codetermined supervisory boards is one of the distinctive features of the German corporate governance system. This study aims to examine the relevance of the frequent assumption according to which this system is rooted in a typically “German culture”.Design/methodology/approachThis research applies Davis and Thompson’s (1994) mobilization theory as an interpretive grid to historical sources to reveal the determinants of the institutionalization of equal board representation in post-war Germany.FindingsThe present contribution reveals that the supposedly “German tradition” of board representation is a myth. The specific regime of codetermined supervisory boards is instead the outcome of the dramatic political and institutional circumstances of the late 1940s, which saw fierce struggles and the mobilization of various actors ranging from politicians and industrialists to trade unionists.Originality/valueThe German Catholic Church is shown to have played a significant, albeit seldom recognized, role in this search for institutional consensus. It acted as a broad-based “supporting institution”, positively influencing mobilization efforts in favor of board codetermination and ultimately enabling an agreement to be reached.

Impact of ownership and pay structure on voluntary remuneration reporting: Evidence from Germany

Based on the global debate on the development of executive pay as well as the lack of transparent information that has prompted the implementation of far-reaching legal reforms, this paper aims to determine the quality of voluntary remuneration reporting of top management in Germany. To investigate the impact of ownership and remuneration structure on voluntary remuneration reporting, an OLS regression analysis is used. To assess the quality of remuneration reporting, we calculate a total score for 160 listed companies on the basis of a scoring model derived from four criteria. The criteria are individualized remuneration disclosure, use of the German Corporate Governance Code model table, information on the say-on-pay vote and on the role of the compensation consultant. This study comes to the result that reporting quality in Germany differs heavily and depends on ownership and remuneration structure. On the one hand, a high share of fixed remuneration shows a significant negative and the existence of family shareholders a simple negative impact on reporting quality. In contrast to this, a high percentage of the free float as well as highly variable compensation influence voluntary remuneration reporting in a positive way. Simultaneously, the company’s performance correlates significant negative while company size and leverage ratio show no effect at all. This paper extends upon prior research that has identified determinants of the voluntary individual disclosure of management remuneration in Germany (Andres and Theissen, 2007; Chizema, 2008). The new findings of this paper partly differ from former research and help to derive statements that are more current, comprehensive and go beyond the results of the previous studies. Furthermore, the insights offer implications for firms, theory, and new opportunities regarding future empirical research.

Code Compliance Study 2018 - Analysis of the Declarations of Conformity with the German Corporate Governance Code (Version February 2017)

Code Compliance Study 2018 - Analysis of the Declarations of Conformity with the German Corporate Governance Code (Version February 2017)

The Dialogue between the Chairman of the Board and Investors: The Practice in the UK, the Netherlands and Germany and the Future of the German Corporate Governance Code Under the New Chairman

The dialogue of the board and its chairman with investors is an established practice in many countries, such as the United Kingdom, the USA, the Netherlands, Belgium, France and recently also Germany. In the UK this dialogue covers the whole range of relevant board topics, certainly including good corporate governance aspects such as the composition of the board and the remuneration of the directors as well as good corporate culture and ethics in the corporation. In Germany this dialogue may also take place between the chairman of the supervisory board and institutional investors; this is firmly established in the practice of most of the DAX-30-corporations, and some other corporations follow the trend. This practice is taken up by many codes of good corporate governance, for example in the UK Corporate Governance Code 2014 and the UK Stewardship Code 2012 as well as in the Corporate Governance Codes of France, the Netherlands, Belgium, the USA and since 2017 also in the German Code. The investor dialogue involving the chairman of the board, both in the one-tier and the two-tier systems, is legal and legitimate, but it has three main limits: insider trading and market abuse, company secrets, and equal treatment of the shareholders. The latter limit creates practical problems which are met by the various codes in different ways. While the competence for investor relations is primarily with the CEO viz. the chairman of the management board, the chairman of the (supervisory) board should also be available – within reasonable limits – to discuss supervisory board-related issues with investors. This has been rightly suggested by the German Corporate Governance Code, though it has met with certain doctrinal concerns. In many countries this dialogue is not restricted to the chairman of the board but extends to other board committe chairmen, to the senior independent directors and sometimes to all directors. It can be expected that the chairman of the board’s dialogue with investors will sooner or later not only become a general practice, but that it will also be considered to represent good corporate governance.

The impact of corporate governance on auditor choice: evidence from Germany

Statutory audits are only beneficial if the appropriate audit quality is both provided and perceived by the users of audited financial statements. On the one hand, Big 4 audit firms are commonly viewed as producing high quality audits. On the other hand, regulators complain about the high market share of Big 4 audit firms. In this context, it is of interest to examine the drivers of a Big 4 audit firm selection. Despite extensive prior research, there is still a lack of findings form Continental European countries and on the impact of corporate governance on auditor choice. This paper on hand is intended to fill the related research gap. Thus, our study identifies variables that determine the auditor choice of large German listed companies. Based on a sample of 432 firm-year observations for the period 2010–2014, our logistic regression analysis suggests that the corporate governance structure influences auditor choice significantly. Notably, the annual meeting frequency of the audit committee and the size of the supervisory board are positively associated with the engagement of a Big 4 audit firm. However, the meeting frequency of the supervisory board and the compliance to the German corporate governance code are negatively related to the choice of a Big 4 auditor. Additionally, the proportion of female supervisory board members does not exert a significant impact. The results remain stable when the DAX30 observations, for which statutory audits are exclusively performed by Big 4 audit firms, are excluded. The main contribution of our paper is, that it sheds light on the impact of corporate governance variables not analyzed by prior research, like supervisory board characteristics, deviations from a corporate governance code, or the female quota, in a Continental European setting, and that it mainly indicates a complementary relationship. Despite the peculiarities of the German setting, the two-tier corporate governance system and the low level of investor protection, the findings of our study are not only relevant for Germany, since many other Continental European countries are characterized by a similar environment. The study’s findings are of particular interest for regulators when addressing audit market structure problems.

Code Compliance Study 2017 - Analysis of the Declarations of Conformity with the German Corporate Governance Code (Version May 2015)

English Abstract: The Code Compliance Study 2017 examines the acceptance level of the current version of the German Corporate Governance Code (GCGC) within DAX and MDAX firms. The study analyses overall compliance, as well as the firms’ compliance behavior on the level of chapters, items and even single GCGC recommendations. In addition, the study examines the firms' governance quality based on four specially constructed governance indices that represent the the key areas of governance (transparency, monitoring/control, incentives and diversity). Moreover, compliance behavior with respect to GCGC's suggestions as well as the relationship between firm characteristics and compliance levels is analyzed. Overall, the study presents a broad and comprehensive view on code compliance behavior of German listed firms. German Abstract: Die Studie analysiert und bewertet systematisch und umfassend die Akzeptanz der aktuellen, dreizehnten Fassung des Deutschen Corporate Governance Kodex (DCGK) durch DAX-und MDAX-Gesellschaften anhand der durch §161 AktG vorgeschriebenen Entsprechenserklarungen. Analysiert wird das grundsatzliche Niveau der Kodexakzeptanz, aber auch das Entsprechensverhalten der Gesellschaften auf Kapitel- und Ziffernebene, bis hin zur Analyse einzelner Empfehlungen. Daruber hinaus untersucht die Studie die Governance Qualitat der Gesellschaften basierend auf vier eigens hierfur konstruierten Governance Indizes, welche die Kernbereiche Transparenz, Kontrolle/Uberwachung, Anreizsysteme und Vielfalt abbilden. Erganzt wird dies um Analysen hinsichtlich des Verhaltens bezuglich Kodexanregungen, des Zusammenhangs zwischen Complianceverhalten und Unternehmensgrose bzw. Eigentumerstruktur und einer Analyse der im Rahmen der Entsprechenserklarungen gegebenen Erlauterungen. Im Rahmen der Studie werden die bis 31. Marz 2017 veroffentlichten Entsprechenserklarungen (gemas §161 AktG) der in DAX und MDAX notierten Gesellschaften analysiert. Die untersuchten Unternehmen reprasentieren zu Ende 2016 etwa 88 Prozent der Marktkapitalisierung des Prime Standard der Deutschen Borse, sodass die Studie einen umfassenden und gleichzeitig individuell- differenzierten Blick auf die marktrelevante Akzeptanz des DCGK in den grosten deutschen Aktiengesellschaften vermittelt.

Survey On Competence and Administration of Supervisory Board Activities in German Stock-Listed Companies

AbstractAccording to the agency theory (Jensen & Meckling 1976), it is expected that there exists a positive relationship between corporate governance and company performance which is also generally assumed in recent research (Dignam & Galanis 2016). This relationship is investigated in the study performed by the author of this paper. Two different approaches were chosen in parallel: (1) quantitative data analysis, based on financial figures and corporate governance variables, and (2) a survey of supervisory board members of listed German companies. This paper is about the results of structured interviews with 30 supervisory board members. The survey confirms that corporate governance regulations have an important influence on the administration of supervisory board activities and on board competence. Many supervisory board members stated that the German Corporate Governance Codex leads to extended meeting time to fulfil regulatory requirements, more data requirements to identify and estimate risk issues and to rising risk awareness. The interview results converge with the results from the multivariate analysis.

Mergers and acquisitions in Germany: 1981–2010

We examine the long-term performance of German acquiring firms for M&A transactions that took place between 1981 and 2010. Over this period, the German corporate governance system experienced substantial changes that led to the emergence of an active M&A market. In contrast to many U.S. studies, we do not find significant negative abnormal long-term performance for our full sample. However, the results support the method-of-payment hypothesis. For our first subsample, from 1981 to 1990, when M&A transactions were rather rare, acquirers exhibit positive abnormal long-term returns compared to their German industry peers. Our findings are robust for various firm and deal characteristics and consistent with our analysis of pre and postmerger operational performance and announcement returns.

Internal Audit Effectiveness: Multiple Case Study Research Involving Chief Audit Executives and Senior Management

The focus of this study is the relationship between chief audit executives (CAEs) and senior management (SM) and its relationship with internal audit (IA) effectiveness. The study reveals differences between more and less effective IA functions and offers explanations by studying organizational, personal, and interpersonal factors within the German corporate governance context. The findings show that the pattern of interaction between CAEs and SM is a key determinant of IA effectiveness. This study highlights the danger of viewing customer satisfaction as the key measure of IA effectiveness since in practice expectations can vary significantly and as sometimes very little may be demanded. Moreover, CAEs typically adjust to expectations, upward and downward. CAEs can drive the agenda as well. When it comes to personality factors, “Fingerspitzengefühl” and swimming in the organization characterize the successful internal auditor. IA designations for CAEs were not found to be of added value. At the organizational level, the findings show that companies that are considered as “hidden champions” demand and benefit from effective IA practices.

Comparing corporate governance codes in Germany and Eastern Europe – An analysis of different corporate governance characteristics

A series of accounting scandals and company failures led to a loss of trust by investors in an organization’s management, which triggered extensive debates regarding Corporate Governance. Eastern European countries require additional regulatory actions due to the privatization programs as a result of the transformation from the planned to market economy. The different corporate governance systems of the individual countries in terms of the monistic one-tier or the dualistic two-tier system resulted in distinctive contents of the corporate governance codes. Despite the differences, all codes have a common objective: to strengthen the confidence of investors through good corporate governance. The objective of this paper is to evaluate the similarities and differences of the Corporate Governance Codes (CGC) in various Central and Eastern European (CEE) countries. To do so, the CGCs of Romania, Slovakia, Slovenia, Hungary and Poland are illustrated and compared to the German Corporate Governance Code. On the basis of a broad theoretical model, the national characteristics of the CEE countries are linked to the respective code and the central components are evaluated in detail.

RISK AVERSION IN THE BOARD ROOM. AN ANALYTICAL APPROACH ON CORPORATE GOVERNANCE OF GERMAN STOCK-LISTED COMPANIES

According to the agency theory, a positive relationship between company performance and good corporate governance should exist. A broader study of the author of this paper examines a sample of German stock-listed companies whereas Germany can be seen as one of the most highly regulated countries concerning corporate governance. The overall purpose of the author’s study is to analyze the effect of supervisory board characteristics and procedures on firm performance. Several corporate governance variables such as number of committees, board independency, supervisory board compensation, personal risk liability, etc. are examined regarding their effects on firm performance in terms of firm growth and profitability. Two different approaches were selected: (1) a quantitative data analysis, based on financial figures and corporate governance variables, and (2) a survey of supervisory board members out of this sample. The total sample consists of 128 German stock-listed companies. The financial data are obtained from the financial databases providers ThomsonOne and Morningstar. The corporate governance data are also collected from annual reports and from corporate governance compliance statements. According to the German Corporate Governance Codex (DCGK) each stock-listed company has to explain their compliance with the DCGK rules. Thus, the DCGK represents a benchmark of good corporate governance and allows collecting objective and comparable quantitative data to estimate the corporate governance level. The main data analysis methods are bivariate analysis and tests for statistical differences (t-test), the latter in particular to find differences between groups clustered by their 5-years total shareholder return (TSR) growth resulting in a TSR top-30 group and TSR bottom-30 group. While the fulfilment of good corporate governance standards over all shows no significant effect on firm performance, this paper focusses on the findings that risk aversion in the board room is increasing as a result of governance regulations and that growth outperformers have a lower degree of risk aversion. It is concluded that an own-risk deductible in the DO Supervisory Board; Principal–Agent Theory; Risk Aversion; Firm Performance; DOI: http://dx.doi.org/10.5755/j01.eis.0.10.16191

Shareholder Wealth vs. Stakeholder Interests? Evidence from Code Compliance Under the German Corporate Governance Code

In order to better differentiate the drivers of corporations' actions, in particular shareholder wealth and stakeholder interests, the paper explores the significance of the comply or explain-principle and its underlying enforcement mechanisms more generally. Against this background, compliance rates with specific provisions may shed a light on companies' reasons for following the code. An analysis of these rates at the example of distinct provisions of the German Corporate Governance Code is therefore entered into. In light of the current corporate governance debate and the legitimacy problems that are raised, among the code provisions that exemplify these questions very well are those regulating incentive pay, severance pay caps, and age limits for supervisory board members. Their analysis will lay a basis for an answer to the question about what motivates companies to comply with the code. The motivation then paves the way to arrive at a further specification of the determinants of the regulatory evolution of the Code and the range of stakeholders and their concerns that enter into it.